Make sure you know your advisor before starting a business relationship. One of the most critical questions, “Are you required to act as a fiduciary?”
It is estimated that 85% of financial advice professionals are not required to act in the best interests of their clients, as Tara Siegel Bernard clearly illustrated in her October 10th New York Times article.
A non-fiduciary “advisor” is allowed to sell you anything that is merely suitable for you. A true fiduciary is required offer advice and products that are the best available (this is no guarantee that all will).
Given a choice between two, otherwise identical, mutual funds, a fiduciary would have to offer the cheaper of the two. A typical broker can sell you the fund that costs more (and makes them more money). They are not required to even mention the lower-cost alternatives.
This article showed that, to most firms, you are just a means to meet quotas and boost the next quarters results. To a few, rare advisors, you are an integral part of both their current and future business. These advisors understand that their livelihood ultimately depends on your long-term success.
The right advisor:
- Never receives commissions
- Charges annual fees of less than 1% per year.
- Creates and manages portfolios based on your needs and risk aversion.
- Relies on peer-reviewed academic investing research (therefore a good advisor:)
- Uses no-load, passive investments
- Provides ongoing support and guidance.